How can costly infrastructure such as water supply systems be made more sustainable? In the past, technocrats have set the design criteria, but how important are political and institutional factors? What costs and charges should policymakers take into consideration? And who else holds a stake in water supply? Looking at these questions in Tamilnadu, researchers from Birmingham University propose new economic concepts applicable to institutions providing rural and urban water for India. The approach in focus - a 'new institutional economics' - takes heed of various legal, administrative and political transactions involved in producing and delivering a public water supply.

Maintenance of information systems and negotiations with landowners, industry and other water users, all cost time and money, as do interactions with other agencies. Raising charges from all users also increase costs, while strategic decisions are based on political rather than technical criteria - another hurdle to cost-efficiency. Differing institutional arrangements and levels of efficiency may have positive or negative effects on the scale of these 'transaction costs'. Using evaluation criteria such as efficiency, equity, accountability and adaptability, the report suggests ways to minimise transaction costs. Its main findings on the gap between costs and charges are:

• In rural areas, no taxes or charges are levied on domestic water supplies. Water is perceived as a free public good. The full cost is borne by the state government but the scheme is financially unsustainable.
• Some rural households are willing to pay for better services. This preparedness to pay is far more common in developing countries than commentators have previously tended to assume.
• Domestic consumers who are able to pay would prefer to have an individual household supply than contribute to the improvement of community standpipes.
• Consumers are more willing to pay for water if they perceive the supply as reliable. Only 17 percent of Indian households with a piped-in supply are satisfied. Such dissatisfaction raises doubts over whether the government should continue to be the sole supplier.
• People may be willing to pay more for schemes run by user groups or private enterprise. This shift could stop the downward spiral of low revenues and deteriorating infrastructure.
• Urban water supply systems yield higher revenues, which could be improved still further. Poor households could be supplied with adequate minimum quantities at nominal rates.
• There is greater scope for privatisation, competition and economies of scale in urban water provision.

The report's suggestions as to policy options for boosting sustainability of water supplies include steps to:

• assess where transaction costs can be minimised and how accountability can be strengthened
• merge the functions of construction and operations-maintenance into a single-purpose agency
• improve revenues by catering to rural demand for more individual household connections
• improve equity and buffer environmental impacts by supplying differential services to individual households and to communities as a whole, such that community users need pay only nominal charges
• encourage user participation in campaigns to reduce corruption, information costs and inefficiency, and improve maintenance and project effectiveness
• make the most of capacity within rural communities for collective action, for example through local clubs, co-operatives, and non-governmental organisations
• decentralise management to enhance user participation, through training, R&D, but standards enforcement may still have to be administered at provincial or national level
• assess reliability of present water systems and the potential for private sector provision.

Funded by: ESCOR (DFID), UK (1994-1995)

id21 Research Highlight: 1998-June-19

Further Information:
Richard Batley
International Development Department (IDD)
School of Public Policy
University of Birmingham
Edgbaston
Birmingham
B15 2TT
UK

Tel: +44 ( 0)121 4144985
Fax: +44 (0)121 4147164
Contact the contributor: R.A.Batley@bham.ac.uk

The International Development Department of the School of Public Policy, University of Birmingham, UK